Australia lifts ban on some short sales

LyndalMcFarland

MELBOURNE (MarketWatch) -- Australia's securities regulator Monday lifted its eight-month ban on covered short selling of financial stocks amid signs of stabilization in the global financial system, but warned it will quickly reinstate the ban if trading activity threatens stability in the sector.

The Australian Securities and Investments Commission said that it will watch short selling activity by all market players, including hedge funds.

"ASIC has reviewed market conditions and considers that the balance between market efficiency and potential systemic concern has now moved in favor of the ban being lifted," ASIC said in a statement.

There have been some signs of a stabilization in the global financial sector in recent months following significant turbulence in the latter part of 2008. Equity markets have rallied, and many of Australia's big financial group have raised capital in recent months to bolster their balance sheets and provide a buffer against slowing economic conditions.

"ASIC will not hesitate to re-impose the ban immediately and without consultation if it considers market conditions warrant such action," it said.

Limited Market Impact

The market response to the lifting of the ban was relatively muted.

IG Markets Research Analyst Ben Potter said the fact that ASIC indicated it won't hesitate to reinstate the ban if there is any sort of predatory behavior, particularly by hedge funds, limited the impact.

"Given this, it's very unlikely we'll see hedge funds looking to recommence this type of behavior," Potter said in a research note. "Overseas, where most major markets have already lifted the bans, the selling has been fairly limited so there is no reason to believe Australia would be any different."

Some modest selling pressure was evident in select financial stocks on the back of the news.

At 0126 GMT, Macquarie Group Ltd. (MQG.AU) shares were down 4% at A$32.15 and Perpetual Ltd. (PPT.AU) was down 4.4% at A$31.47. Suncorp-Metway Ltd. (SUN.AU) was down 1.9%, but volumes traded across the market were relatively low ahead of the Memorial Day holiday in the U.S. tonight, traders said.

UBS head of Sydney sales trading George Kanaan agrees that the end of the ban is unlikely to have a significant near-term impact. "There will be some shorting, but generally speaking, I don't think it will have a material impact on share prices," Kanaan said.

Short-selling is typically conducted by hedge funds but institutional funds also use the practice to provide downside protection in falling markets. Short-sellers borrow shares and sell them, hoping they can buy the shares later at a lower price and turn a profit.

ASIC first put a blanket ban on short selling of all stocks on Sept. 21, 2008, in the days following the collapse of U.S. investment bank Lehman Brothers to act as a circuit breaker and restore confidence in the market.

ASIC lifted the ban on covered short selling of non-financial stocks on Nov. 13 last year, but defied global trends in keeping the ban on covered short selling of financial stocks. It had considered lifting the ban several times in recent months.

Late last year, Australian lawmakers outlawed naked short-selling, which occurs when a seller doesn't have an agreement in place to borrow the shares that it has sold.

Credit Suisse strategists said in a note last week that they expect "the removal of the short selling ban in Australia will on balance prove to be an important catalyst for financials stocks", but there are arguments about how big the impact could be.

"Financials globally have (been) re-rated at a juncture that is quite early in the global recession, creating the risk that perceptions of overvaluation emerge, particularly if buoyant equity markets pull back again," the strategists said in the note.

However, the strategists also said that financials have recapitalized, reducing near-term risks including bankruptcy, which often underpins a short selling strategy.

News flow from financials has also improved in recent months, Credit Suisse said.

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